FM: Has the fact that BMO is not involved in proprietary trading become a positive?
JT: Absolutely. The Volcker rule is going to make pure prop desks something of the past. We never had that a strategy as an institution or as a foreign exchange group. We always had a client service strategy. Not that that was always a good thing. There was a lot of money made in proprietary trading so I am not saying we’re so smart, we just did not like the risk profile associated. I as a manager in foreign exchange would say to people all the time ‘if I am betting in the foreign exchange market that the dollar is going up, I am going to be right half of the time and wrong half of the time because I don’t have enough information about this complex market. The only way that you can truly make money in this market is if you are listening to clients, you’re taking orders and you are playing off of the flows that come through your business. You may do a deal for a client and realize that a lot of clients are buying dollars, that information that you get from dealing with your clients and information you provide back to your clients. That is the value.
FM: The United States has been pushing China to float their currency. Will this happen? When? Would it be a good thing?
JT: Eventually but not any time soon. The primary focus of the Chinese government is the domestic situation that faces them on a daily basis. They have a wealth distribution issue; there are a lot of people, they need a GDP that is growing quickly and they need to control an economy so it doesn’t get white hot and so they can keep that population gainfully employed and fed. It is a communist government that has very tight controls and is liberalizing in baby steps. That is to protect the domestic situation in China, it is not to get everybody in Washington pissed off at them. It is really to just make sure that they don’t have a situation with massive unemployment [and a] high level of inflation. They are trying to keep their economy growing sensibly. They are gradually liberalizing the CNY (yuan) and they are using something called the CNH, which is the deliverable within Hong Kong. That is the first step to internationalize the currency, which means you can actually trade in the CNH in Hong Kong and buy CNY to pay your bills. But it is a different currency; there is CNY, which is the yuan that exists onshore and there is CNH, which is the yuan that exists in Hong Kong. There is also an offshore CNY market that is non-deliverable; there is a difference in price in the non-deliverable market and the onshore market. I believe over time the CNY will internationalize and become more freely floating but that will not happen in any time frame that is set externally from that country. That will be a domestically driven policy change that is done in a way that will meet the overall economic goals of China. When will it happen? Five to eight to 10 to whatever number of years from now.
FM: There is growing fear of China’s power in the United States based on its holding of U.S. debt. Is this fear misplaced?
JT: All of that fear is misplaced. China’s economic interest is aligned with the U.S. They’re the second largest trading partner; they are producing things for us to buy. It would be like saying ‘do you want to shoot an arrow through the heart of your best customer?’ Well no, because then your best customer is not coming back to the table. China needs to grow; it has a population that needs more sophisticated operations and jobs. They need the assistance of the United States to buy their goods, they need the assistance of the United States from an intellectual capacity perspective, to have more eco-friendly factories and all of those would be done in a way that is aligned with its trading partners. It is a very different cultural and political system, so [they] won’t always sound like Americans or Canadians or Europeans when they speak but their interests are incredibly well aligned with their customers, and we are their customers. I do not believe China is to be feared; I don’t think there is any ulterior motive. They are trying to manage a domestic situation that needs to be carefully controlled. They are trying to liberalize in a time frame that meets their domestic agenda and they are trying to operate with a global environment in a way that best serves their interest, so killing their best customer is not in their interest. They have also done very well on their U.S. debt, so it’s worked. There are lots of mutual benefits that these two countries have and a lot of what I hear is political rhetoric.